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DQweek2Econ.docxAdam Pelletier
ThursdayNov 5 at 5:04pm
"Marginal rate of substitution (MRS), is defined as the amount of product Y that the consumer will be willing to give up for one more unit of product X while remaining at the same level of total utility. The stipulation that the consumer remains at the same level of total utility makes it clear that we are talking about a movement along a particular indifference curve and by convention we define the MRS for a movement down a particular indifference curve" (Douglas, 2012, Section 3.1).
Most people have a set budget that they must follow in either the monthly or yearly manner. As a consumer the goal is to not go over budget and ultimately create stress when paying bills. My wife and I play a lot of softball and budget money to account for entry fees, food and drink, and hotels or camping. This year we did not play very much so we had some extra money, so our decision was to book a nice weekend away with massages the week before Christmas. In other years we substitute softball that we don't play with going away camping for the weekend.
The marginal rate of substitution (MRS) formula is (Hayes, 2019):
\begin{aligned} &|MRS_{xy}| = \frac{dy}{dx} = \frac{MU_x}{MU_y} \\ &\textbf{where:}\\ &x, y=\text{two different goods}\\ &\frac{dy}{dx}=\text{derivative of y with respect to x}\\ &MU=\text{marginal utility of good x, y}\\ \end{aligned}
The purpose of finding out the MRS and indifference curves that represent the two goods is to understand what the consumer wants and at what level they can afford it. The assumption is that the consumer earns a salary and can spend that money on goods and services as they choose. "This analysis is easily extended to recognize credit cards, bank loans, and previously accumulated wealth on the one hand, and nondiscretionary expenditures on the other, but a simple introduction is provided by assuming that the consumer has a limited budget equal to his or her weekly wage or salary income" (Douglas, 2012, Section 3.1).
Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
Hayes, Adam. November 7, 2019. Marginal Rate of Substitution (MRS). https://www.investopedia.com/terms/m/marginal_rate_substitution.asp
2. David Hwu
ThursdayNov 5 at 6:09pm
Marginal rate of substitution (MRS) is the amount of product Y that a consumer is willing to give up for one more unit of product X while maintaining the same level of difference for each person. (Douglas, 2012). The law of diminishing marginal rates of substitution states that MRS decreases as one moves down a standard convex-shaped curve, which is the indifference curve. A good economic example can be when items are substituted, the consumers’ satisfaction or utility will vary based upon the consumption of the product.
For example, a consumer must choose between hamburgers and hot dogs, like at Five Guys. To determine the marginal rate of substitution, the consumer is asked what combinations of hamburgers and hot dogs provide the same level of satisfaction. Factors of Marginal Rates is the utility. The utility is likely to remain high if you do not frequently consume hamburgers rather than hot dogs on a regular basis. This utility will decrease if you begin eating more hamburgers.
Now there is a Limitation of Marginal Rates of Substitution, the Marginal Rate of substitution does not examine a combination of goods that a consumer would prefer more or less than another combination. This generally limits the analysis of MRS to two variables (Hayes, 2019).
The slope of the indifference curve is critical to the marginal rate of substitution analysis. The indifference curve between two goods will reveal at which point the utility is the same, and this will represent the marginal rate of satisfaction (MRS). Therefore, when I consume Hamburgers regular basis, you will see the marginal utility decrease, and this would also be true of any substitution consumed besides hamburgers such as cola. The MRS slope may remain steady when looking at the consumption of itself as this is something I have every day consistently. This may be true for other individuals that can consume a product on a daily basis without tiring of it, such as coffee, or certain places they frequent for lunch.
Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/ (Links to an external site.)
Hayes, A. (2020, August 28). Inside the Marginal Rate of Substitution. Retrieved November 05, 2020, from https://www.investopedia.com/terms/m/marginal_rate_substitution.asp
3. David Hwu
ThursdayNov 5 at 6:10pm
The importance of business economics is to fully understand market demand across various functions such as pricing, quality, advertisement, and the revenue generated for the product produced or service generated. Pricing elasticity is looking at the amount of product being demanded by consumers against a change in the product’s sale price (Douglas, 2012). In this scenario we are to compare two types of smokers referred to in Hainer’s article, the question asked are which would likely recognize a change in elasticity price over the other? Is it the smoking addict or the “social smoker”?
If a tobacco company increased its prices for a pack of cigarettes due to increase taxation or environmental changes, the addict will immediately notice. It does not necessarily change the demand for the product unless the increase is considered outrageous in which case the addict will likely pursue a different company’s product as a replacement that is more affordable such as Vape or nicotine patches.
The “social smokers” in many cases since the purchase of a pack of cigarettes is less frequent due to lower demand, the price increase will likely go unnoticed. Social smokers may not be addicted to nicotine, but that does not necessarily mean that they're not hooked on smoking (Hainer, 2010). Due to this, the demand would be assumed to remain constant and an increase in price would increase the elasticity.
The biggest risk for tobacco companies is losing their core base of their addicted customers. Yet there are other options tobacco companies can pursue when taxation becomes overburdened to addicts that have found other solution for their nicotine fix. Tobacco companies can pursue new into new markets in different countries that have less restrictive tax and health regulations such as Asia. Understanding the impact changes have on the demand for products is critical to remain competitive in any industry due to the dynamic market.
Reference
Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/ (Links to an external site.)
Hainer, R. (2010). Social Smokers Aren't Hooked on Nicotine, Just Smoking. Cable News Network. Retrieved from http://www.cnn.com/2010/HEALTH/04/24/social.smokers/index.html
4. Tayvia Shamburger
ThursdayNov 5 at 7:49pm
Price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price (Douglas, 2012). I would say price of nicotine would cost more for a group of nicotine addicted users than social smokers. Nicotine addicted users are almost known as chain smokers so even if the price increased, they would notice but they’re going to also continuing pay for the pack of cigarettes or tobacco for examples because they have to smoke. These smokers, who remain something of a medical mystery, have smoked up to a pack a week for years, or even decades, without becoming dependent on nicotine. When they stop smoking for a day or two, they suffer none of the cravings, irritability, and other withdrawal symptoms that torment addicted smokers (Hainer, 2010). Habits are created in our adolescences years so if we don’t pay attention to correct them they will convert into adult habits such as nicotine addicted smokers always having to have a cigarette to enjoy with morning coffee daily.
When it comes to social smokers, they tend to smoke in a group setting such as bar, girl’s night out, birthday event, on or vacation. These events are occasional and therefore for a social smoker there no monthly budget however on the contrary, a monthly budget may exist with nicotine addicted smokers. These smokers know the average cost of a pack of cigarettes and quality of each brand; therefore the demand is more. The government encourages citizenship to stop smoking and adopt a healthy active lifestyle. With the government polices in effect to reduce the negative effects on smoking, their tactics being used is to inconvenience consumers to stray away from tobacco industry. For example, the government imposes higher fees on health insurance premium for individual whose is a nicotine addicted smoker. Those who are nicotine addicted smokers they have to pay a higher premium on insurance since the products they are consuming are affecting their overall healthy, body and organs functioning. Therefore the polices the government are trying to implement is for the best interest of the consumer so they can stop smoking but again it’s not as effective since consumers will pay for their wants and justify their needs to smoke.
References
Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version].Retrieved from https://content.ashford.edu/ (Links to an external site.)
Hainer, R. (2010). Social Smokers Aren't Hooked on Nicotine, Just Smoking. Cable News Network. Retrieved from http://www.cnn.com/2010/HEALTH/04/24/social.smokers/index.html
